This article is written by M.Manaswini Reddy of KVRR Law College, Osmania University. The article provides an insight into the biggest scams in India.
It has been published by Rachit Garg.
Table of Contents
Introduction
A scam in generic terms is known as fraudulent action, illegal activity or one that is a dishonest scheme. In legal terms scam is defined more elaborately. It essentially means the intentional use of deceit or dishonestly depriving a person of their legal right. Scams are also known as white-collar crimes, which means that these are crimes that have characteristics of deceit, concealment and violation of trust and are usually committed by business professionals for financial gains. A scam has both civil and criminal factors, each of which has a different set of penalties. For example, a scam that would harm a person economically would invoke civil liability as opposed to one which results in breaking or violation of the law.
Background of scams
Scams are of several types, to understand and identify each one of them, they have been classified into two broad categories: Financial sector scams and Corporate Espionage.
Financial sector scams
Money Laundering: Section 3 of the Prevention of Money Laundering Act, 2002 defines money laundering as any person who
- attempts to indulge
- knowingly assists
- is a party to or is involved
in an activity associated with directly or indirectly obtaining property as a result of any criminal activity that might not be necessarily specified under a statute and projecting it as untainted property shall be guilty of the offence of money laundering.
In layman’s terms, this means projecting a large amount of money that has been obtained as a result of crime as if it has been untainted or obtained from a legitimate source.
Fraud: Frauds too are a common kind of scam that the financial sector faces, it comes in various forms. Essentially these are actions of scammers who deprive you of your financial health through any illegal, deceptive or misleading activity. Examples of these frauds are identity theft, investment, mortgage credit card and lending frauds.
Tax evasion: Illegal actions done by individuals to avoid paying taxes, could be concealing or deceiving proof relating to income in terms of inflating deductions and financial transactions. It attracts criminal liability as an offence in India.
Several other financial crimes although not so common are prevalent in India, such as cyber terrorism, bribing, insider trading, phishing, etc.
Corporate espionage
Also known as Corporate spying, corporate or industrial or economic espionage is the process of the use of techniques such as wiretapping, hacking, malware, unauthorized trespass into business property/files etc, to spy on financial and business/commercial matters. Attackers use espionage techniques to collect information about the other target/competitor company. Some of the techniques used are wiretapping, hacking, attacking the company with malware or virus, trespassing into company property to access files and identity theft which involves posing as an employee of the company to get information that may be confidential. Corporate espionage is happening at a relatively more extensive rate due to the rise in the use of the digital medium in the operation of businesses and corporations.
Corporate espionage is usually a combination of crimes such as bid-rigging, cheque forgery, patent infringement, false financial statements, duplicate shares, secret commission, ATM offences and introduction of malware in a competitor’s system to illegally get information on trade secrets, data or confidential information. Most of these crimes are executed by targeting computer network systems and communication devices. Acquiring trade secrets without the consent of the owner is against the law.
The nature of this crime is such that it goes unreported since the companies do not want to attract negative media in addition to the loss caused to it by one of the worst frauds calling for laws that directly deal with this crime.
Biggest scams in India
ABG Shipyard Bank Scam
Facts
ABG shipyard is a company associated with the ABG group that has been in the business of shipbuilding and repairs since 1958. The company has two shipyards in Gujarat and Rishi Kamlesh Agarwal was its former chairman and managing director.
The company is involved in the biggest banking fraud in India of Rs 22,848 crores, called the ABG shipyard scam. Between 5 years from 2012 to 2017, the company borrowed loans from a consortium of 28 banks but did not use the money for the purpose they borrowed it.
The company availed loans even during the 2008 global deflation caused due to the financial crisis which led to the fall in demand and price of commodities as well as cargo. This adversely affected the shipyard industry.
Followed by this, in 2014 State Bank of India decided to restructure the loans given to the company under the Corporate debt restructuring.
Since the company had faced financial trouble due to the global financial crisis it could not pay instalments causing it to be declared as a non-performing asset.
Consequences
As a result of which SBI identified the fraud in 2019 January and filed a complaint.
An audit conducted by Ernst and Young reported evidence of fraud by the company between 2012 to 2017, the funds received via loans were being misappropriated and diverted to be invested through overseas subsidiaries or shell companies causing a criminal breach of trust with an intention to gain unlawfully from the loan funds and money laundering.
An FIR was filed by CBI in February 2022 after it sought clarifications from the complaint filed by SBI in 2021.
Nirav Modi PNB Bank Fraud
Facts
Known as the biggest corporate scam in India, it shook the entire banking system of the country. In a 14,000 crore rupee scam, Nirav Modi a well-reputed designer and jeweller is the main accused.
Nirav Modi’s firm Firestar Diamonds started soaring and expanding across countries through loans taken through a buyer’s credit from the Brady House branch of Punjab National Bank acting as the importer’s bank in January 2018.
The letter of undertaking that works as a bank guarantee allowing a person to borrow money from another bank’s foreign branch and is under the liability to pay the loan amount in case of default by the borrower generally calls for collateral or cash margin.
The officials who approached to take the buyer’s credit for the loan being given by an overseas bank claimed that they had been issued buyer’s credit without any margins previously.
From then on the letters of undertaking which are issued for a buyer’s credit which is a short term loan were fraudulently reissued because PNB’s core banking system was not linked with SWIFT (Society for Worldwide Interbank Financial Telecommunications) a messaging network for banks across the globe, is alerted when a letter of undertaking is issued for money to be loaned from an overseas bank.
While the message of issuing an LOU did go through via SWIFT it was not recorded in the core banking system of the bank, based on these LOU the money kept getting transferred to the Nostro account of PNB which is an account in foreign currency.
Consequences
A case of unauthorised reissue of LOU beyond its general validity for gems which was only 90 days, falses in audits, certain colluding officers and the use of shell companies resulted in a fraud carried out over 6 years.
At present CBI and Enforcement Directorate are involved in auctioning and recovering properties through the attachment of property. Nirav Modi who fled to London is now in jail. An extradition treaty has been approved between India and London to extradite him, although he has appealed against it.
Karvy Stock Broking Limited
Facts
From April 2016 to October 2019 a money heist of Rs 2800 crores in the form of stocks was robbed meticulously from investors.
Karvy Stock Broking company grew to be one of the most popular retail brokerage houses after it set foot as an intermediary for retail investors to invest in the stock market.
Owing to its popularity and fast-paced growth, investors started choosing Karvy for their transactions in stocks and conversions of their stocks to Demat accounts.
The securities invested by them in the company’s confidence were used fraudulently to take multiple loans from banks, without the knowledge or consent of the investors and misappropriating the Power of Attorney given by them.
It is alleged that these loans were taken to fund their real estate company Karvy Realty. The securities used for the loans were syphoned off from the Depository Participant accounts with which the stockbroking company had no legal rights to deal. These accounts operated specifically only for any obligatory requirements to be met by clients.
The firm moved shares to another Demat account by the name of Karvy stockbroking BSE to be able to show them as their securities and avail loan against the same. To not get caught, the misappropriated amount was never shown in reports submitted to the National Stock Exchange.
Consequences
Although this was an established market practice, SEBI issued a circular regarding stockbroking companies dealing in their client’s securities, especially asking them to refrain from pledging securities.
A deadline was issued by SEBI to sort the securities by September 30, 2019. When Karvy failed to do so, the investors complained and an investigation began.
As a result of which few actions took place, Karvy was banned by SEBI, the Bombay Stock Exchange and the National Stock Exchange removed the company from being their member and the securities were auctioned and the Union Ministry of Corporate Affairs was asked to probe into the company for financial fraud.
Vijay Mallya Scam
Facts
The infamous case of money laundering of Rs. 9081 crores (estimated amount including interest) of bank loans were executed by famous liquor baron Vijay Mallya.
Tagged as ”the first businessman to be pronounced as a Fugitive Economic Offender(FEO) under Section 12 of Fugitive Economic Offenders Act of 2018.
From taking over his father’s business to expanding it in the airlines and liquor sectors. A young 28 year old was seeing the success of his company’s fast-paced growth.
During the downfall of the global aviation industry in 2012, Mallya acquired Air Deccan which resulted in him taking loans from 17 banks.
These loans were never repaid and he escaped arrest by leaving the country. To the State Bank of India alone he owed Rs. 1600 crores.
All this money was allegedly invested in shell companies and was laundered overseas. There were speculations that the money was utilised in transactions related to the IPL team The Royal Challengers Bangalore and the F1 racing team Force India.
Consequences
While he escaped to Britain before his arrest in 2016, a warrant was issued against him under The Prevent of Money Laundering Act of 2002. He was imprisoned following the same only to be given bail which cost 65,000 pounds along with having to hand over his documents.
Satyam Computers Scam
Facts
The Rs. 14000 crore scam under the timeline from 2008 to 2015 was known as one of the largest corporate frauds in India.
Satyam computers were established in 1987 by B.Ramalinga Raju, an IT company based out of Hyderabad.
It was listed on the stock exchange between the years 1990 and 1991 on the Bombay stock exchange company.
Soon after this when Ramalingaraju observed the growth in the value and demand for real estate, he started buying properties all over India registering them in his name as well as several of his family members. He established Maytas Infrastructure and Maytas Properties.
Ramalinga Raju started gathering finances to buy these properties by misrepresenting and manipulating the financial statement showing differences in profits of Satyam computers.
The board, stakeholders, market and investors were misled in terms of company revenue, profits and liabilities, and interests, all of which were shown in inflation.
This misrepresentation led to the rise in share prices thereby attracting investors to the supposedly financial solid base created by Satyam computers.
Hence, Ramalinga Raju and his brother had to sell their shares and a few other shares were pledged against a loan to buy even more properties, especially those that were connected to a massive infrastructural project.
Projected as an aggressive property buyer, Ramalingaraju manipulated fake invoices and bank statements as though his profits were saved as cash reserves in the bank.
Thereby creating a huge gap between the actual figures and misrepresented figures, which he tried to bridge as the properties lost their value due to the 2008 recession.
As a last resort, he tried selling his Maytas Infrastructures and properties which rendered him useless and he confessed to his crimes in 2009.
Consequences
With the involvement of SEBI and CBI, he and his accomplices were sentenced to 7 years of rigorous imprisonment with a fine of 5 crores.
SEBI said that companies are obligated to change their auditors every 10 years.
The scam teaches the importance of proper corporate governance that each company must have, a sign that every investor must look out for.
Harshad Mehta Scam
Facts
The Harshad Mehta scam alone brought down the entire stock market, done on a huge scale this securities scam was all about government bonds, loopholes in the financial system and manipulation of the market.
An authenticated stockbroker of the Bombay stock exchange, Harshad Mehta utilised the concept of ready forward deals where the government issues securities for big projects, while the government raises finances from investors it also has interest charged on the same.
These short term loans of 15 days involve securities being transferred to one bank from another by the way of bank receipts and then brought back by the lending bank at a higher rate.
Mehta, acted as a broker between the lending and the borrowing banks, misappropriating funds to invest them in the stock market and utilising them for his gain. Since there was no actual transfer of securities from one bank to another the borrower bank would issue bank receipts for the securities being transferred to the lender bank.
Fake bank receipts, influential connections of banks, bureaucrats, politicians, brokerage agencies and several bank employees led to a scam that was reported by senior journalist Sucheta Dalal.
Consequences
CBI probe followed by Mehta and his brother spending three months in jail, after which Mehta and his family’s assets were attached and were charged with 76 criminal cases, 600 civil suits and various tax irregularities.
Dated back to 1992, the effect of this scam was 4000 crores and called for restructuring of the entire banking system in India. It tightened the involvement and powers of the Reserve Bank of India bringing in a separate audio system and a new committee to overlook SEBI
2g Spectrum Scam
Facts
The biggest case of state corruption and massive irregularities indirectly lead to a change in the ruling government. The 2g Spectrum scam is a 7 year-long scam that left the Indian government and telecom department distraught.
With a presumptive loss of Rs. 1.76 crores, this case dates back to 2008 when the second generation of wireless technology was introduced.
While the telecom companies/mobile operators needed a licence to use the spectrum, the same was obtained by bidding held by the government.
The then minister for the Department of Telecom Andimuthu Raja was termed accused of this scam since he misappropriated several little important details of the bedding that was held.
Such as, the deadline to apply with the DOT for the licence was 1st of October 2007 although the minister moved it to 25th of September allegedly for certain mobile operators namely Swan and Unitech that bribed him.
All the firms that were applying for a licence were to have followed obligations such as being able to cover 10% in the district headquarters in the first year and 50% in the district within three years, without which a licence was not to be given.
Although, what happened was there were relatively new firms that did not even have a tower set up. The licences were bid at the market price of 2001 for the benefit of these firms. It was said that A. Raja acted against the law, finance and Telecom Regulatory Authority of India ministries.
All the money he received as bribes he allegedly deposited in banks overseas. As such he customised the rules to allocate licences as per bias and favouritism.
Consequences
The Controller and Auditor General of India submitted a report in 2010, stating that India had faced a presumptive loss of Rs 1.76 crores due to the market price of 2001 being used although the accused were acquitted on the notion that a figure realised due to calculating the 2008 market price and computing the loss was no proof of a scam.
It was said that DOT used such market price to encourage more diversity and not to make any revenue, it was a planned policy and not an abuse of power by the government.
The Commonwealth Games scam
Facts
The commonwealth games happen every 4 years bringing in participants from various nations that constitute the commonwealth nations. In 2010, India hosted the commonwealth games in its capital city New Delhi.
The commonwealth games were allocated a budget of 12 billion rupees and saw participants from 71 different countries. 20 cities were developed to aid the multi-sport event along with the setting up of what was called a Games Village. A committee chaired by Suresh Kalmadi who led the scam of Rs 70,000 crores.
The funds were misappropriated during the preparatory phase with the use of arbitrary powers of the organising committee chairman. While the original amount sanctioned was Rs 1000 crores it was later revised to 2460 crores.
Not only were the funds misappropriated, for example, the contract offer of Rs 141 crores from the chairman to Swiss Timings for timing equipment which was considered extremely high and unnecessary, but also several issues arose on the political and administrative front.
The funds were misappropriated in the areas such as bus services, metro services and inaugural ceremony, while the budget for facilitating these services for the tournament crossed what was initially allocated to them by the government. Several transactions were manipulated with the use of overly expensive resources
Despite the expenditure, there was a delay in the maintenance of the venue, proper facilities were not provided, there were several last-minute problems and the program management saw a huge low.
Consequences
As a result, there was a Central Vigilance Commission probe which led to the removal of Kalmadi from the committee, his arrest on 25th April 2011 and suspension from the Congress Party.
In 2012 Delhi High Court restrained him from participating in the opening ceremony of the London Olympics.
The committee along with Kalmadi was charged with criminal conspiracy, forgery to cheat, cheating and other sections of the Prevention of Corruption Act 2002.
Bofors Scam
Facts
A deal worth 1.4 billion dollars was signed between Indian National Congress and AB Bofors a Swedish company that supplied arms and ammunition to the Indian Army.
The contract was signed in 1986 for the supply of more than 400 155mm Howitzers guns. Since the supply was twice that mentioned in the contract the amount of money invested by the Indian Government was very high.
Various projects were sidetracked to fund this contract. An announcement made by the Swedish National Radio put then Prime Minister Rajiv Gandhi in the limelight.
It was alleged by the Swedish company that 40 million dollars had been paid to middlemen towards the success of the deal. A report by Sweden’s National Audit Bureau affirmed this allegation along with the presence of undue influence, although it was denied by the Rajiv Gandhi government.
Consequences
As a consequence, Rajiv Gandhi lost the ninth general election to V.P. Singh. The Swedish Audit report was followed by a report by “The Hindu” exposing the scam through the bank accounts related to the deal.
This alerted the Comptroller and Auditor General to investigate further into the matter which revealed that the commission was paid but the information as to whom it was paid could not be retrieved.
Since Bofors was not budging it was decided that unless the information is retrieved the contract would be cancelled and the company would be blacklisted. Bofors decided to send a delegate to deal with the matter when the Ragive Gandhi Government abruptly stopped the investigation.
An FIR was filed by V.P. Singh on the grounds of abuse of power, cheating, criminal conspiracy, and forgery against people such as Win Chadha principal agent of Bofors, Ottavio Quattrocchi an Italian businessman, the Hinduja brothers etc, CBI started investigating the case.
CBI investigation led to the freezing of five Swiss bank accounts and 18 names of potential middlemen being given. Although the case was dismissed on a lack of evidence and loopholes in the investigation
Jeep Scandal
Facts
The oldest and first major scam of Independent India dates back to 1948. It was a scam of political nature and sheer ignorance.
The main perpetrator V K Krishna Menon the Indian High Commissioner to Britain signed a contract worth 80 lakhs for refurbished jeeps during the Indo-Pak war period.
While the price for 2000 jeeps purchased was equal to the price of new jeeps that could have been brought from the USA or Canada, he argued that the delivery would be immediate and with spare parts. Another blunder that Krishna Mennon did was that as per the earlier contract 65% of the amount would be paid only after completion of 20% inspection and a certificate of the same.
Krishna Menon agreed to have only 10% be inspected without a certificate of inspection and pay 65% of the total amount which was $172,000 upfront. The capital of the company providing the jeeps was only $605 causing 155 jeeps that were delivered to be in a position such that they could not be utilised.
What happened next was the company that supplied the jeeps, Anti-Mistantes suspended delivery when the government did not accept the unserviceable jeeps.
The company went out of contract with Menon who had to enter into another contract with S C K agencies for 1007 jeeps.
It was agreed that these would be supplied as 12 per month for six months and then 120 jeeps a month accordingly. However, only 49 jeeps were supplied in two years and the government was also not compensated especially after all the losses due to previous contracts.
Consequences
The misuse of influence and abuse of power to not follow protocols coupled with money being paid upfront along with the Prime Minister forcing the government to accept the unserviceable jeeps, the scam unfolded.
The Ayyangar Committee investigated the scam and came up with statistics that were refused to lead to the government closing the case.
Causes for scams
Apart from the fact that scams are seen as a crime and are done with a malicious intention, there are other reasons why fraudsters carry out such criminal activities on various platforms such as banks and financial institutions, corporate governance, and stock markets as well as Technology. Certain psychological factors include the need for media attention and social recognition. Most fraudsters have a strategy to attack those that are emotionally vulnerable when it comes to their investments. The greed for exclusivity and status consumes them, making them ignore generic due diligence and background checks. The abuse of power by fraudsters blindsides most targets since they view them as powerful and influential. The Indian banking system and banks are targeted most frequently due to the lack of adhering to processes/rules, poor corporate governance and weak supervision. Possibly one of my most frequent issues with any scam and why it has been done in the presence of loopholes in each system that is targeted.
Conclusion
Loopholes in the law create opportunities for fraudsters to commit crimes. While amending and developing laws as per the changes in the society is not the only solution, such scams highlight the frequency of agencies not taking responsibilities seriously and abusing powers arbitrarily. Rectifying these actions is rather tough but never impossible when there is strong supervision that follows all rules and regulations according to the applicable law. Where there is a responsibility, there is accountability and that would ensure all measures are being taken to avoid any such irregularities.
References
- https://theprint.in/theprint-essential/5-years-28-banks-rs-23000-cr-debt-how-abg-shipyard-pulled-off-indias-biggest-bank-fraud/831696/
- https://blog.ipleaders.in/all-you-need-to-know-about-the-nirav-modi-scam/
- https://timesofindia.indiatimes.com/city/hyderabad/karvy-scam-heres-how-it-unfolded/articleshow/85471866.cms
- https://blog.ipleaders.in/analysis-vijay-mallya-case/
- https://blog.ipleaders.in/case-study-satyam-fraud-case/
- https://www.indiatoday.in/business/story/harshad-mehta-securities-scam-india-legacy-of-bank-fraud-1733374-2020-10-20
- https://www.indiatoday.in/fyi/story/what-is-2g-scam-in-india-2g-scam-verdict-upa-a-raja-cbi-judge-op-saini-verdict-things-to-know-1113444-2017-12-21
- https://blog.ipleaders.in/commonwealth-games-scam-legal-timeline/#:~:text=CWG%20scam%20was%20one%20of,the%20authorities%20to%20shabby%20flats.
- https://blog.ipleaders.in/understanding-bofors-scam-legal-implication/#What_was_the_Bofors_Scam
- https://myvoice.opindia.com/2021/05/congress-and-scams-the-jeep-scandal-1948-and-nehrus-ignorance/
- https://economictimes.indiatimes.com/news/economy/indicators/scams-in-india-reasons-why-fraudsters-continue-to-thrive/articleshow/21878911.cms?from=mdr
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